Oil Price up over $61, U.S. Dollar Heading for a Meltdown

There is not much new to add to the stock market narrative today. If you made a list of key heresies that contradict the orthodoxy of the market establishment you’d have about four main tenants. First, stocks don’t always go up. Second, real estate does not always go up. Third, diversification is a sham in a massive asset inflation. Fourth, gold and other precious metals are the best and only real “alternative asset” during an inflationary melt-up.

Yep, that about covers heresies. Meanwhile, the ASX assault on 6,000 continues. But that too, is a sham. Crossing and staying above 6,000 is not the same kind of thing as Magellan circumnavigating the world or putting a man on the moon. It’s a bogus benchmark designed to keep people complacent, placid, and inattentive. And it’s working!

But the energy markets are heating up. First, the price of oil is back over $61. This time the concern is the imminent U.S. driving season. But the maybe the deep- seated concern, that unarticulated knowledge that markets possess in the aggregate, is that global production of cheap oil has peaked out at 84 million barrels per day.

If you have a slightly weightless sensation about the oil price right now, take a seat next to us in economy class on Qantas. The current “vibe” of the oil market reminds us of those NASA training flights where you get to practice weightlessness. A plane climbs up at a steep incline and then dives down. The upward momentum of the climb, however, produces a few minutes of weightlessness for the passengers, where you are free to practice looking like an arse unbound by the laws of gravity.

In oil terms, we are on the plateau of Hubbert’s Peak. It’s that period where oil production doesn’t increase any longer, but it doesn’t radically decline either, at least not yet. Gravity reasserts itself on the back side of Hubbert’s Peak. But on the plateau, oil prices have a rather pleasant, airy feel about them.

But for how much longer?

Speaking of gravity and trajectories, we’ve been e-mailing back and forth with an accomplished currency trader who’s IQ is higher than our weight (in pounds). He tracks movements in money supply (M1) and then uses them as a leading indicator of trends in consumer spending and the economy, all of which we find fairly convincing. We wrote to him, however, that we were not certain why M1 would indicate the direction of consumer prices when there were so many other sources of money and credit in the world. Our inquiry wasn’t and isn’t hostile, it’s merely inquisitive.

He wrote back, “the whole idea that commodity prices follow changes in M1 with a lag is well known in Austrian economic circles through Frank Shostak etc and mises.com commentaries: what hasn’t sunk in is how this idea overthrows current economic theory and portfolio management – there is no random walk down wall street.”

He sent us some charts to review and wrote, “The charts are easy to read – the ones you have, look at the CPI one [no need to update the chart shows that the US CPI [less food and energy] will rise for the next two months – then fall quiet considerably – which could presume a major deterioration in US economic activity – did I read your columns on recession etc for some time – well this analysis seems to promote that idea but based on changes in M1 rather than US housing cycle, no savings, reduced consumer spending etc which all are a symptom of money supply changes…..the same with the FX graphs – the FX lags changes in M1 and with the AUDUSD and EUROUSD it shows that the USD should be strong for the next 6 months then collapse.”

Hmm. A U.S. dollar meltdown? Sounds possible to us. But a collapse in CPI? We’ve been expecting an inflationary melt-up, not a deflationary collapse in prices. But a credit contraction (via the subprime market) and a simultaneous fall in money supply would certainly take a wrecking ball to the balance sheet of the U.S. consumer. Watch this space.

It looks like the Labour party is removing the nuclear plank from its platform well ahead of the Federal election. “More Labour support for uranium mining,” reads a wire service article from today. This time it was Labour resource spokesman Chris Evans who said, “Clearly the world has changed and the Labour Party has got to change with it.” Spoken like a true politician. Find where the crowd is headed and then cut to the front of the line to “lead” it.

The nuclear debate is probably over. That is, more mines will eventually open all over Australia. What’s just now being understood is that there is a major bottleneck in uranium enrichment, turning the ore into usable nuclear fuel for the world’s growing stock of nuclear plants. There are only a handful of global companies that can enrich uranium. And only one of them is Australian.

We didn’t mean to be mean-spirited about Ben Cousins and his drug addiction yesterday. We hope he gets help. Addiction sucks.

But we did mean to point out that excesses in personal behavior are also the sign of a kind of inflation in the animal spirits of people in a boom time. The Jazz Age was the Jazz Age partly because the 1920s were awash in rising stock prices and global travel. Surrounded by the signs of wealth, people acted wealthy, and then irresponsibly, taking excess to the extreme.

Today isn’t so different from then, except that people have different tastes in fashion and music. Today, you wouldn’t call it another Jazz Age. Maybe you’d call it the Ice Age, in recognition of how popular recreational drug use has become (although this might confuse and offend Al Gore). Either way, the financial/moral question remains…

Why do people go a little crazy during inflationary times? What is the relation between money and human action? Maybe inflation causes a kind of moral vertigo. When prices and values become so far removed from reality that they become difficult to distinguish, understand, or predict, why bother behaving as if money had constant value?

In fact, why bother as if anything had constant value? Why not have another drink? Why not have a good time? Everyone else certainly is. Everyone is “flying high.” Thus the spirit of an age goes from boom to debauch.

It’s not a heresy to say a bust follows a boom. It’s just in bad taste. But that doesn’t mean it isn’t true.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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1 Comment on "Oil Price up over $61, U.S. Dollar Heading for a Meltdown"

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Alan Edwards

I don’t think that upward momentum is responsible,the weightlessness is caused by a free fall environment.

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